Maine news, sports, weather from Portland Press Herald / Maine Sunday Telegram, Portland, Maine

August 3, 2012

Erasing red ink without austerity

The Associated Press

BUENOS AIRES, Argentina - Bond payoffs are supposed to be boring, but Argentina's president is celebrating Friday's final $2.3 billion payment on a bond given to people whose savings were confiscated a decade ago, calling it a lesson for European countries now mired in foreign debt.

The nation's economic disaster left thousands with a grim choice after the government seized their dollar-denominated deposits to stop bank runs in 2002. They could switch to devalued pesos and regain access to what was left of their savings, or accept a piece of paper promising to repay the money in dollars over the next 10 years.

Few had any faith in the government's promises back then. Argentina had just defaulted on more than $100 billion in foreign debt, banks were shuttered, the economy was in ruins, and streets were filled with pot-banging protesters whose chants of "throw them all out" would send five presidents packing.

But Argentina has mostly paid up after all, making good on 92.4 percent of that defaulted debt so far, including $19.6 billion in U.S. currency over the years to cancel the Boden 2012 bond. Most of the hard-luck investors later sold the bonds at a loss, but as the government makes its last $2.3 billion payment on Friday, the few stalwarts who kept the faith have been made whole, while earning a modest 28 percent profit over the years.

"It was good business" for anyone who got the bonds early and held them, said Jorge Oteiza, a bond trader with Banco Comafi in Argentina. "To have the same buying power you had back then isn't bad."

President Cristina Fernandez, who planned a major speech on the debt problem at the Buenos Aires stock exchange Thursday night, has frequently called on European nations to follow her lead, refusing to bow to international financial pressures and avoiding painful austerity measures on those who can least afford it.

"A disastrous era for the Argentine people is now history," her economy minister, Hernan Lorenzino, wrote in a column published by the government's Telam news agency. "We've also demonstrated that you can emerge from crisis without austerity measures. At the same time this debt was paid, unemployment dropped along with infant mortality. While we got out of debt, we grew 8 percent."

Argentina's foreign-currency debt has dropped from a daunting 166 percent of GDP at the end of 2002 to a more manageable 42 percent of GDP at the end of 2011, said Ramiro Castineira of the Econometrica consulting firm. "If before it was a burden to shoulder, now it's just a handbag. It doesn't restrict the economy as it did in the past," he said.

However, the debt has grown in nominal terms during the same period, from $137 billion to $179 billion.

Many economists suggest the official story is misleading at best, since the government has refused to pay billions of dollars in other bad debts while borrowing freely within Argentina, taking money from pension funds, provinces, state-owned banks and the central reserve to stimulate the economy.

In her determination to make Argentina financially independent, critics say Fernandez has only shifted the debt burden onto her citizens, with policies that damage the country's growth potential and rob retirees of their pensions.

"It's wonderful to see Argentina pay down debt, but for every dollar they're paying down, they're borrowing two or three through the other window, and increasingly from their own people," said Arturo Porzecanski, an expert on emerging markets at American University in Washington.

Lorenzino proudly described the Argentine recipe in his column on Wednesday: Spurn the requirements of the International Monetary Fund and World Bank. Strong-arm the so-called "vulture funds" into accepting lower returns on their risky bets. Nationalize private pension plans, the airline and now the YPF oil company, putting their assets to use creating jobs. And tap central bank reserves to pay down international debts.

(Continued on page 2)

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